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OPTION PRICING VIA MONTE CARLO SIMULATION
A WEAK DERIVATIVE APPROACH
Published online by Cambridge University Press: 27 July 2001
Abstract
Using a weak derivation approach to gradient estimation, we consider the problem of pricing an American call option on stock paying dividends at discrete times. Similar simulation-based sensitivity estimators were introduced earlier by Fu and Hu (1995) who used smoothed perturbation analysis. We improve upon their results by presenting an estimator with a uniformly lower variance. In addition, we reduced the multidimensional optimization problem of pricing an option with multiple ex-dividend dates to a one-dimensional one. Numerical examples indicate that this approach saves a considerable amount of computation time. Our estimator holds uniformly for a class of payoff functions, and applications to other types of options will be addressed in the article.
- Type
- Research Article
- Information
- Probability in the Engineering and Informational Sciences , Volume 15 , Issue 3 , July 2001 , pp. 335 - 349
- Copyright
- © 2001 Cambridge University Press
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